US dollar drops, bitcoin hits record high before Trump inauguration as investors focus on policy announcements

The US dollar dropped and bitcoin hit an all-time high on Monday before Donald Trump's inauguration as US president later in the session

The US dollar fell on Monday while bitcoin hit an all-time high ahead of Donald Trump's inauguration as US president later in the session, with investors focusing on policy announcements that could immediately affect the greenback.

The yen strengthened, clinging to a one-month high touched on Friday, as traders wager that the Bank of Japan will hike its policy interest rate this week.

Trading volume was expected to be thin due to the US markets being closed for the Martin Luther King Jr Day holiday.

Softer US inflation data and the prospect of multiple Federal Reserve rate cuts have recently boosted risk assets, including bitcoin, which hit a record high on Monday at US$109,071.86 (HK$848,978.62) and was last up 4.2 percent at US$108,025.

Trump has promised to be a "crypto president," and is expected to issue executive orders aimed at promoting widespread adoption of digital assets.

Some analysts now feared delays in the US Administration implementing measures could trigger a "sell the news" reaction, potentially disrupting the positive momentum.

Investors' attention was firmly fixed on the policies Trump will enact on his first day in office.

At a rally on Sunday, Trump said he would impose severe limits on immigration.

Goldman Sachs strategists expect US policy changes to support US dollar strength, but cautioned about near-term risks due to the market's expectations for swift action on tariffs.

The US dollar index, which measures the US currency against six peers, was 0.32 percent lower at 109.08. It hit last week a 26-month high of 110.17.

It has risen 4 percent since the November presidential election as traders anticipate Trump's policies will boost growth and inflation.

"There are high expectations of Trump announcing trade tariffs under executive order along with many other policy announcements that could prompt further US dollar gains," said Derek Halpenny, head of research global markets at MUFG.

The euro advanced 0.39 percent to US$1.031, but remained near a two-year low touched last week as tariff threats weighed.

"If International Emergency Economic Powers Act is invoked for trade, markets should see that as a strong statement of intent that the US is planning large-scale tariffs," said Sjay Rajadhyaksha, research analyst at Barclays, after assessing what announcements could immediately affect markets.

IEEPA is a federal law in the US that grants the president the authority to regulate economic transactions in response to unusual and extraordinary threats.

On the fiscal front, "we will be watching to see if President Trump mentions fiscal stimulus," Rajadhyaksha said.

The yen was last at 156.11 per US dollar, not far from the one-month high of 154.98 touched on Friday, with sources telling Reuters the BOJ was likely to raise its policy interest rate this week barring market shocks when Trump takes office.

Governor Kazuo Ueda and his deputy said last week the central bank would debate whether to hike, signalling an intention to take borrowing costs higher at a Jan. 23-24 policy meeting.

A hike by the BOJ would be the first since last July, when the move, coupled with weak U.S. jobs data, shocked traders and triggered a global market rout in early August.

Investors will focus on clues for the rate outlook as money markets pricing implied an 80 percent chance of a 25 basis points rate hike and 50bps by year-end.

HSBC's chief Asia economist Fred Neumann said economic data in Japan suggested that monetary policy normalization was certainly warranted this year.

The BOJ should have raised rates in December, said Neumann at HSBC's outlook event in Singapore. "So we think it's now good to do this (hike rates).”

Investors were also monitoring developments in the Middle East after Hamas released three Israeli hostages and Israel freed 90 Palestinian prisoners on Sunday, marking the first day

of a ceasefire halting a 15-month-old war.